Global Economic Risks have taken a noticeable and abrupt turn downward over the last 30 days. Deterioration in Credit Default Swaps, Money Supply and many of our Macro Analytics metrics suggest the global economic condition is at a Tipping Point. Urgent and significant actions must be taken by global leaders and central banks to reduce growing credit stresses.

MORAL METASTASIS : Malfeasance, Manipulation & Malpractice - Metastasis is the spread of a disease from one organ or part to another non-adjacent organ or part. Cancer occurs after a single cell in a tissue is progressively genetically damaged to produce a cancer stem cell possessing a malignant phenotype. These cancer stem cells are able to undergo uncontrolled abnormal mitosis, which serves to increase the total number of cancer cells at that location. The moral fiber of our society is going through this same process as it breaks down, spreads and metastasis. We are presently in the process of Moral Metastasis that will prove fatal if not immediately operated on and surgically removed. Sadly, however it has gone undetected too long and the damage it has caused is now irreparable. MORE>>

The market action since March 2009 is a bear market counter rally that has completed a classic ending diagonal pattern. The Bear Market which started in 2000 will resume in full force when the current "ROUNDED TOP" is completed. We presently are in the midst of of a "ROLLING TOP" across all Global Markets. We are seeing broad based weakening analytics and cascading warning signals. This behavior is typically seen during major tops. This is all part of a final topping formation and a long term right shoulder technical construction pattern. - The "Peek Inside" shows the detailed coverage available this month.

TRIGGER$ publications combine both Technical Analysis and Fundamental Analysis together offering unique perspectives on the Global Markets. Every month “Gordon T Long Market Research & Analytics” publishes three reports totalling more then 380 pages of detailed Technical Analysis and in depth Fundamentals. If you find our publications TOO detailed, we recommend you consider TRIGGER$ which edited by GoldenPhi offers a ‘distilled’ version in a readable format for use in your daily due diligence. Read and understand what the professionals are reading without having to be a Professional Analyst or Technician.

By now it is no secret that the primary beneficiary of the over $7 trillion pumped by global central banks into the financial system in just the past 4 years, and countless other trillions in miss-spent fiscal stimuli has been the stock market. But what about the global economy: after all five years after BNP Paribas stopped withdrawals from their investment funds - the unofficial start of the Great Financial Crisis - whose primary beneficiaries have been corn, gold, silver and brent - we should have seen at least some sustained impact in the economy if all Econ 101 teaches us about the virtuous business cycle is true, and if any of this countless money out of ZIRP air actually made its way into the economy instead of just the stock market. Well, let's take a look shall well. Courtesy of Bridgewater we present a chart of coordinated interventions and their impact not on the stock market, but on the economy. What we find is that it was, is, and will be a centrally planned world after all.

The three contractions in global growth that have occurred since the financial crisis were offset by heavy blasts of fiscal and monetary stimulation by global governments and central banks. But each wave of support has also had less impact on global conditions than the previous wave. We remain concerned that the ability of those policy responses to stabilize the situation is diminishing. The third wave stabilized global growth after last summer’s dip and allowed for the bounce in global conditions and markets over the early part of this year – but its impact on global conditions was more modest than that of earlier waves of stimulation. As the third wave has ended, global growth has again rolled over.

The scariest thing about the above chart? The ever lower global growth bounce as a result of ever increasing, or exponential, central bank intervention.

In other words, not only is conventional economics wrong about virtually everything, but the impact of whatever the real underlying story is, certainly not one that can be captured by econometric models which continue to falsely model out what is essentially a system of infinite complexity and soaring fragility, has increasingly diminishing returns.

Also, when we get to the point on the chart above where global growth is at or below zero irrelevant of how much "money" is pumped into the system, that will be the moment to shut the lights out, because it is then that the central planning fat finger which has to date mostly impacted various intraday inflection points in the S&P, will simply press CTRL-P. And not let go.

08-12-12

GLOBAL MONETARY

17 - Shrinking Revenue Growth Rate

EARNINGS - Q2 Recap

Q2 earnings seasons is now (with 93% of firms reporting) over, and it is time for post mortem. The bottom line for those strapped for time is the following: In order to salvage the 2012 earnings consensus for the S&P, the sell side crew and asset managers, as wrong but hopeful as ever, are now expecting Q4 2012 earnings to grow 15% versus 4Q 2011, which is more than twice as fast as any other quarter. Indicatively, Q2 2012 earnings rose at a rate of 3% compared to Q2 2011. Elsewhere, revenues came 2% lower than consensus estimates at the start of the earnings season.

And the kicker: The S&P 500 bottom-up consensus EPS estimate for 3Q fell 4% during the past five weeks and management guidance has been more negative than usual. Consensus expectations imply no earnings growth for the S&P 500 versus 3Q2011. This number will certainly drop more and will be the first Y/Y EPS decline since the Lehman failure.

In other words, the entire year is now a Hail Mary bet that in Q4, the time when the presidential election, its aftermath, as well as the debt ceiling and fiscal cliff acrimony will hit a peak, a Deus Ex Machine will arrive and lead to a 15% rise in earnings. Why? Because global central bankers will have no choice but to step in and thus lead to a surge in EPS multiples even if the underlying earnings are collapsing. With the presidential election around the corner making Fed QE before 2013 now virtually impossible, with Spain (and Italy) refusing to be bailed out and cede sovereignty thus precluding ECB intervention, and with China spooked by what may be a surge in food costs, this intervention, and any hope that the Hail Mary pass will connect, all look quite impossible.

As the chart below shows, in this bizarro market, the lowest 2012 consensus earnings to date can only be matched by the highest PE multiple. Brilliant.

From Goldman:

2Q earnings results disappointed across the globe. In the US and Europe, P/E multiples have expanded more than fund managers might realize because earnings estimates are too high. The divergence between trends in earnings and valuation is likely to become more pronounced as profit forecasts continue to be reduced in the coming months. In the US, our 2Q earnings season takeaways are: (1) disappointing sales; (2) in-line earnings; (3) margins are still declining; (4) 3Q estimates imply no growth while 4Q estimates imply significant growth; (5) earnings estimates are falling, driven by Energy and Materials.

2Q Results by Geography

For the US, sales disappointed more than earnings. 18% of ex-Financials and Utilities companies have posted positive revenue surprises by beating consensus sales expectations by at least one standard deviation, half the historical average. The number of firms that missed sales estimates was twice the historical average. Sales surprises were the worst since 1Q2009. The frequency of earnings beats and misses are largely in line with history.

In Europe, earnings season misses were driven by margins not sales. 239 companies, 54% of market cap, have reported. So far, the frequency of earnings beats, a surprise of 5% or more, is below the three-year average (33% vs. 43%), and misses are slightly higher (40% vs. 37%). Sales results have been modestly positive. Analysts significantly revised down Banks earnings. FY2012 estimates are down 9% over the past month.

In Japan, companies reported further earnings declines. 90% of TOPIX companies (95% of market cap) have reported earnings. Results so far have been disappointing especially in context of the April-June 2011 quarter. Last year, supply chain problems following the March 2011 earthquake resulted in a weak earnings season. Yet operating earnings for the April-June 2012 quarter are down 7.4% year over year. Revisions and guidance have remained muted, which our Japanese strategists see as a sign of caution in the face of macro uncertainty going into 2H.

Across Asia, Consumer Discretionary companies posted stronger results relative to consensus estimates. Similar to results in the United States, Energy and Materials posted the weakest results relative to consensus estimates. Singapore posted the strongest results relative to consensus while Taiwan was weaker.

In the US and Europe, P/E multiples have expanded more than fund managers might realize because earnings estimates are too high.

1. Global EPS forecasts are too high. Our top-down, full-year earnings forecasts imply further downside to consensus estimates in the US, Europe and Japan. In each region, the difference between our top-down 2012 EPS growth forecast and bottom-up consensus growth is about 3pp. Our MSCI Asia Pacific ex-Japan earnings growth estimate is in line with consensus.

2. In the US and Europe, P/E multiples have expanded more than fund managers realize. The strong rally in global equity markets during the past five weeks means portfolio managers have re-rated stocks based on policymaker promises rather than fundamentals. On consensus NTM EPS, the S&P 500 P/E multiple expanded from 12.6X to 12.9X. The Stoxx multiple rose from 10.0X to 10.7X over that same period of time.

4. Meanwhile, despite weak earnings season, the S&P 500 is up 3.6% since July 6. Other global indices have also rallied sharply with Stoxx up 6.2% and MSCI Asia Pacific ex Japan up 4.0%. TOPIX is down 2.6%.

Details of 2Q Earnings Results for S&P 500

A total of 456 firms in the S&P 500 have now released 2Q 2012 results representing 93% of the equity cap. Below we highlight our takeaways:

1. Sales disappointed. Realized sales are 2% lower than consensus estimates at the start of the season. 2Q2012 sales for S&P 500 (excluding Financials and Utilities) grew by 3% year over year.

2. Earnings in line with expectations. S&P 500 realized 2Q EPS is tracking at $25.49, a 2% positive surprise versus the consensus estimate at the start of reporting season. On a quarterly basis, 2Q2012 EPS will post year over year growth of 3% vs. 2Q2011. Telecommunication Services and Financials EPS grew by 26% and 14%, respectively. On a trailing four-quarter basis, 2Q2012 will establish a new EPS peak of $99.

3. Margins beat, but LTM margins are declining. With earnings beats and sales misses, 2Q quarterly margins are 20bp higher than expected (9.1% vs. 8.9%). Year over year, quarterly margins are flat to negative in most sectors. The trailing-four-quarter net margin for the S&P 500 is tracking at 8.8%.

4. Earnings expectations are falling and 3Q estimates imply no growth. The S&P 500 bottom-up consensus EPS estimate for 3Q fell 4% during the past five weeks and management guidance has been more negative than usual. Consensus expectations imply no earnings growth for the S&P 500 versus 3Q2011. Energy and Materials are the most significantly negative.

5. Over half of consensus 2012 EPS growth is from strong 4Q forecasts. 4Q earnings are expected to grow 15% versus 4Q2011, more than twice as fast as any other quarter. 4Q2011 growth was about half that of the other 2011 quarters, which explains some of the growth discrepancy between quarters in 2012. Analysts forecast a sudden jump in LTM margins to a new peak of 9.0% in 4Q2012 while we forecast further slippage to 8.7%.

We often hear that the central banks printing money in order to keep the stock market inflated and broke countries afloat for just a few days longer is nothing to worry about. The reason we are given, is that even though the central banks are pumping trillions into the economy, inflation isn't an issue. And after all, the velocity of money has actually declined. That's the message from the "smart" people anyway. This chart shows that as M2 grows (Red), so does inflation ie: CPI (Green) - yes, this is the government's calculation, we'll leave it there for this chart's purpose. Also of note is the monetary base without the banking ponzi scheme of fractional reserve banking (Blue).

So as you can see, inflation actually follows M2 growth, even as the velocity of money (below) declines. Don't be fooled by those who tell you that printing money isn't causing inflation, because it is doing just that each and every day.

There are those who believe that velocity of money is a product of fast growing inflation (not a cause). Inflation has been rising consistently with the growth in money supply, but the velocity of money has declined. You can imagine what happens once velocity of money actually starts to turn (hint: something ZH has been warning about for years).

08-12-12

MONETARY

CENTRAL BANKS

MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - August 12th - August 18th, 2012

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